Newsletter of the Society for Health Psychology (Division 38 of the American Psychological Association)

Healthcare Reform and the Avoidance of Moral Hazards

In Homer’s poem “The Odyssey,” Odysseus must sail between two mortal perils, Scylla (a six-headed monster) and Charybdis (a giant whirlpool). Odysseus makes the difficult moral choice to sail closer to Scylla and accept the loss of a few crewmembers, rather than sail too close to Charybdis and risk the loss of the entire ship and crew.

When designing a healthcare system, one is also sailing between Scylla and Charybdis. In this case, however, what we are sailing between is not mortal perils, but rather moral hazards.

In economics, a moral hazard is defined as occurring when a system creates financial rewards for acting in a way that is risky, selfish, or irresponsible, because someone else bears the cost of those actions. A healthcare system may also create moral hazards by creating financial incentives for one party or another to misbehave by taking unfair advantage of a situation. When designing a healthcare system, if one is trying to navigate between moral hazards, how does one decide which is greater? To a significant extent, the assessment of moral hazards is influenced by one’s political philosophy.

The conflict we are experiencing about healthcare has its roots in the origins of this country, as exemplified in the popular musical “Hamilton.” In this story, while Alexander Hamilton advocates a strong centralized approach to government, others, notably Thomas Jefferson, are opposed to this, and favor a decentralized system where greater power is given to the states. Jefferson’s position is enshrined in the Declaration of Independence, where he endorses his belief in the importance of individual liberty:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

Jefferson goes on to state that liberty includes the peoples’ right to be free of excessive taxation without their consent. This belief system is alive and well today, and shapes the conservative orientation towards healthcare, where it is believed that any such system should not encroach on individual liberty.

In contrast, in today’s world the Hamiltonian position has evolved, and is perhaps best represented by another important political declaration, the UN’s Universal Declaration of Human Rights.1 It states the following:

Article 25: Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.

From this vantage point, government has a moral obligation to do what it must to meet the needs of its people. Furthermore, it could be argued that from this position that providing for the needs of the people is the only moral justification for a government to exist. These two competing political philosophies would create healthcare systems with differing moral hazards.

The moral hazards created by a healthcare system based on conservative principles would be as follows:

Without centralized government regulation, healthcare is shaped by free market principles. This creates a healthcare system that is optimized for profit, not for good outcome. For example, in a healthcare system guided by free market principles, excessive surgery is a profit center. The financial incentives to perform surgery may explain why in the United States spinal surgeries are performed at a rate that is 2 to 3 times higher than New Zealand, Australia, Canada, Norway, Finland and the United Kingdom, even though there is no indications that patients in the US are biologically different.2-4 Ironically, in the US system failed surgery creates a larger financial reward than successful surgery, as failed surgery creates demand for more surgery and for more intensive follow-up care. In contrast, good care, by virtue of curing the patient quickly, creates fewer billable procedures and thus tends to be less profitable. Thus, free market principles when applied to healthcare create moral hazards that financially incentivize providers to do the wrong thing, with the cost borne by both patients and payers.

Without centralized government regulation, free market principles also incentivize payers to exploit the market. For example, payers can increase profits by selling policies at the highest price the market will bear, and then denying reimbursement of claims to the extent possible. In a free market, this creates a moral hazard that may incentivize payers to misbehave, with the cost borne by both providers and patients.

While this is not a moral hazard, a moral concern is that without centralized government regulation that provides for extenuating circumstances, some individuals through no fault of their own may experience the onset of disease or injury, and may no longer be able to provide for their own healthcare. The moral concern here is that the lack of centralized oversight shifts the burden to those who are most vulnerable.

The advantage of the conservative approach is that it limits the moral hazards created by the individual. From the conservative vantage point, personal freedom goes hand-in-hand with personal responsibility. You should have the freedom to choose whatever healthcare plan you wish, and to take the risk to go without healthcare if you wish. However, it follows that you must also accept responsibility for your choices. This philosophy would state that the creation of natural consequences for individual misbehavior promotes personal responsibility. Overall, a healthcare system founded on conservative principles is optimized for controlling the moral hazards related to personal irresponsibility, and uses the competition of a free market system to create more efficient medical delivery systems.

On the other hand, the liberal position to healthcare reform also creates moral hazards. They are as follows:

One of the moral hazards of a universal healthcare system is that it would create an unfair burden on some, as hard-working healthy people have to pay high taxes or insurance premiums. At the same time, an irresponsible person who does not work may get healthcare for free, and so this financially rewards irresponsible behavior.

A moral hazard related to the ACA is that the coverage of pre-existing conditions creates a financial incentive for individuals to be less personally responsible. For example, if an insurance policy cannot deny treatments for pre-existing conditions, a moral hazard is that an individual could take an unfair advantage of the policy and not purchase healthcare insurance until after the onset of an injury or illness. Once the person needs medical care, he or she could then purchase a policy, and after receiving expensive care, could cancel it again. If individuals exploit the policy in this manner, it unfairly shifts the cost to the payer, and to other policy holders.

In general, “entitlements” in liberal systems create financial incentives for individuals to be less personally responsible. By removing some of the consequences of dysfunctional behavior, people have greater liberty to be dysfunctional without having to bear the consequences of it. If a patient receives generous disability benefits, there is less economic pressure to work.

On the positive side, liberal approaches limit the moral hazards created by payers and providers. That is, by mandating reimbursement for needed medical care, this approach can eliminate the moral hazards associated with payers who deny care to increase their profit. Further, by utilizing guidelines and utilization standards, liberal approaches can limit the moral hazards created by providers who over-treat.

Overall, while a centrally controlled system is designed to provide the best care for the population at large, the conservative approach is to allow free market creativity to produce a menu of alternate plans, giving individuals the liberty to make their own choices. The latter method is optimized so that responsible individuals with economic resources have access to the best care they can afford.

What I have come to believe is that while a good healthcare system must be based on the best available science and expert consensus, this is not enough. The designers of any healthcare system must decide which is the greater moral concern? The irresponsible individual that exploits the system? Or failure of a society to take care of its citizens? Looking back at the last eight years, I recall two defining moments in this discussion.

In a debate on 9/12/11, Wolf Blitzer framed a question for Ron Paul. The scenario was that a healthy 30-year-old man chooses not to buy health insurance and becomes catastrophically ill, and subsequently presents at the Emergency Department. Wolf Blitzer asked, “Congressman [Paul], are you saying the society should just let him die?” Ron Paul responded, “That’s what freedom is about, taking your own risks. This whole idea that you have to take care of everybody… [he did not finish the sentence].” This question appeared to queery Dr. Paul’s support for the Emergency Medical Treatment Act that requires EDs to treat all who show up, and not turn them away. Dr. Paul was saying from his libertarian interpretation of conservatism that individual freedom means society is not responsible to take care of us, or rescue us from our mistakes. The government should get rid of policies that constrain opportunity. It is then up to you to provide for yourself, and these natural consequences incentivize hard work. Here the defining moral principles are the right to individual liberty, with the associated obligation to be responsible and self-sufficient. The primary moral failures here are sloth and dependency.

On the other hand, in framing his argument for the Affordable Care Act, President Obama chose a question from the Old Testament, “Am I my brother’s keeper?” His answer was yes we are, and this was the moral argument for the Affordable Care Act. From the liberal point of view, society must care for those in need. Here, the defining moral principle is that of grace. Even if our brothers and sisters sometimes act irresponsibly or take advantage of us, this does not discharge us from our responsibility to do the right thing, and to treat them compassionately. In particular, a just society must intervene with populations that are vulnerable and in need, given that this often occurs though no fault of their own. From this point of view, a moral society cannot see a person who is sick or dying, and do nothing. The primary moral failure here is callousness to the suffering of others.

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We are embarking on a voyage that will take us to a new healthcare system. The course we choose will be based to a considerable extent on what we believe to be the greatest moral hazards, and there is potential for both triumph and calamity. And like Odysseus, perhaps we can find a course in the middle where the moral hazards can be limited. We cannot navigate between two moral hazards though without understanding the boundaries of each.

United Nations. General Assembly. Universal declaration of human rights approved by the General Assembly of the United Nations, Paris, 10th December 1948. London,: H. M. Stationery Off.; 1949:5 p.

2 thoughts on “Healthcare Reform and the Avoidance of Moral Hazards”

Philosophies are beliefs about how mankind works. they are based on assumptions. The Libertarian approach is based on an extreme notion (ludicrous) of individual responsibility and the “liberal” approach is based on the extreme notion of group responsibility . The ACA tried to walk the line between the two and didn’t quite make it.

Without an individual mandate for all people to have insurance the basic notion of insurance is impossible..Its entire premise is that the risk is spread across as many people as possible.

The Social Contract notion of government says it exists to serve its people. There was no disagreement about that fact among the founders. That was the radical difference from England.

Ayn Rand’s Objectivism philosophy which Rand Paul follows has a kernel of truth…… people are stronger than we give them credit for and can overcome great odds….many times… but not always. You can demand that some people stand up and they will just to spite you…. But not all people can do that…….

The middle way of being ourr brother’s keeper that Obama tried to build ACA on and that most major developed countries in the world use to provide better, cheaper healthcare for all is something most Americans will strongly support if they have a chance to see it in action. Many who voted for Trump to “Repal Obamacare” are now fighting to keep Obamacare because they finally see what it is instead of what Republicans have been telling them it is for seven wasted years that coul have been used to improve it!!!

Dr. Boone makes some excellent points. Extreme positions on healthcare are appealing as they can appear to offer simple solutions to complex problems. The reality though is that while simple solutions may fix one problem, they can have disastrous consequences. I think we just witnessed an example of that.

After the US Congress had passed over 50 bills to repeal “Obamacare”, saying that they would replace it with something that offered more choices, no mandate to purchase, was more comprehensive, and far cheaper. Who would not be for that?

The reality though was this: While there are numerous shortcomings to the Affordable Care Act, we should not underestimate the difficulty of creating something better. While the 54% approval rating for Obamacare seemed weak, the American Health Care Act (AHCA) replacement bill enjoyed only a 17% public approval rating. It was remarkable that after seven years of campaigning for a change, the plan that was offered was abandoned less than three weeks after it was revealed. After the implications of the AHCA became public, it was reported that numerous members of congress avoided town hall meetings due to the intensity of the public reaction, and they became deadlocked about how to revise the bill. So, they readily walked away from it.

The article above was written about a month before the failure of the ACHA. While there are numerous steps that could be taken to improve the ACA, extreme measures are likely to have extreme consequences.

At the time of this writing a number of politicians have recommended a bipartisan approach to addressing the healthcare problem. Washington is currently so polarized though that this would be difficult.